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Corporate Tax > Ch 4 part 1 > Flashcards

Ch 4 part 1 Flashcards

0
Q

When a corporation makes a nonliquidating distribution to a shareholder, what 2 questions must the corporation answer?

A

1 what are the amount and character of the gain or loss the
Corporation must recognize?

2 what effect does the distribution have on distributing the
Corporation’s earnings and profits?

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1
Q

When a corporation makes a nonliquidating distribution to a shareholder, what 3 questions must the shareholder answer?

A

1 what is the amount of the distribution?
2 to what extent is this amount treated as a dividend
3 what is the basis of the distributed property and when does
It’s holding period begin?

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2
Q

Section 301 requires the shareholder to include in gross income…

A

The amount of any corporate distribution to extent it is treated
As a dividend

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3
Q

Dividend

A 
Distribution of property made by corporation out of earnings
And profits (E&P)
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4
Q

How does section 317a define property?

A

Includes money, securities and other property

Except stock or stock rights of distributing corporation

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5
Q

Distributed amounts that exceed a corporation’s E&P are treated as…

A

Return of capital that reduces shareholder’s basis in his stock
(But not below 0)

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6
Q

Distributions exceeding the shareholder’s basis are treated as…

A

Gain from sale of stock

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7
Q

2 kinds of corporate E&Ps

A

1 current E&P

2 accumulated E&P

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8
Q

Current E&P

A

Calculated annually

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9
Q

What does E&P measure?

A

Corporation’s economic ability to pay dividends to its shareholders

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10
Q

Accumulated E&P equation

A

Accumulated E&P =
(Sum undistributed current E&P for all previous years balances)
- (sum of all previous current E&P deficits + distributions made out
Of accumulated E&P)

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11
Q

Distributions are deemed to be made out of E&P accounts in which order?

A

First out of current E&P

2nd out of accumulated E&P

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12
Q

Computation of current E&P

A

Taxable income
+ income excluded from taxable income but included in E&P
+ income deferred to later year but included in E&P
+/- income and deduction computed for E&P
+ deductions allowed for taxable income purposes/denied for E&P
- expenses and losses denied for taxable income/allowed for E&P
= current E&P balance (or deficit)

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13
Q

Income excluded from taxable income but included in E&P 4

A

1 tax exempt interest
2 proceeds from life insurance where corp. is beneficiary
3 recoveries from bad debts where corp received no tax benefit
4 prior yr. Federal tax refunds

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14
Q

Income and deduction items that must be recomputed for E&P purposes 3

A

1 income for long term percentage completion contracts
(Instead of completed contract method)
2 depreciation on personal and real property
3 excess percentage depletion over cost depletion

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15
Q

3 deductions that are allowed for taxable income but denied for E&P

A

1 dividends received deduction
2 NOL carryovers, charitable carryovers, capital loss carryovers
Applied to current year
3 US production activities deduction

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16
Q

Expenses and losses that are denied for taxable income purposes but allowed for E&P 8

A

1 federal income tax
2 premiums on life insurance (corp is beneficiary)
3 excess capital losses not currently deductible
4 excess charitable contributions not currently deductible
5 expenses related to production of tax exempt income
6 no deductible losses on sales to related parties
7 no deductible penalties and fines
8 non deductible political contributions and lobbying expenses

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17
Q

Income excluded from taxable income but included in E&P: Current E&P includes the recovery of an item deducted in a previous year if…

A

The deduction produced no tax benefit for corporation and

Was therefore excluded from its taxable income

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18
Q

Income deferred to later year when computing taxable income

but included in E&P in current year

A

Gains and losses on property transactions generally included
in E&P is same year they’re recognized for taxable income purposes

With installment sales, entire realized gain must be included
In current E&P in year of sale

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19
Q

Income and deduction items that must be recomputed for E&P: depreciation

A

Must be recomputed under the alternative depreciation system

Sec. 168g

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20
Q

E&P: federal income taxes

A

Subtracted from taxable income

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21
Q

Charitable contributions

A

Current years deduction is subtracted from taxable income

The carryover is added to taxable income and deducted
In later years

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22
Q

Taxation: if current E&P is sufficient to cover all distributions during the year, how is the distribution treated?

2) when does this rule continue to apply?

A

Treated as taxable dividend

2) rule still applies if deficit exists in beginning accumulated E&P
Account

23
Q

If corporation generates both a current E&P deficit and an accumulated E&P deficit, how are the distributions treated?

A

Distributions are treated as return of capital to extent of
Shareholder’s stock basis, distributions exceeding basis are
Taxed as capital gain

Non of the distributions are treated as a dividend

24
Q

If a corporation has both an accumulated E&P deficit of $20k and a current E&P deficit of $15k and the corporation distributes $10k, what is the accumulated E&P deficit for the following year?

A

$35,000, the distribution was not made out of E&P

25
Q

How are gains/losses recognized on distribution from corporation to shareholders of land or inventory?

A

The corporation must recognize the gain but not the loss on the
Distribution

26
Q

When a corporation distributes property to a shareholder, the distribution amount is?

How will the amount of any liability distributed to the shareholder affect the distribution amount?

A

The property’s FMV on the date of distribution

Liability assumed by the shareholder reduces the distribution
Amount but never below $0

27
Q

What is the shareholder’s basis when he receives a property distribution from the corporation ?

When does the holding period begin for the shareholder?

A

FMV basis

Holding period begins the day after the distribution (doesn’t
include the corp’s holding period)

28
Q

When a corporation distributes property and liabilities to a shareholder, how do the liabilities affect the shareholder’s income and adjusted basis?

A

Liabilities reduce the shareholder’s income

Liabilities don’t affect the shareholder’s adjusted basis in
The distributed property

29
Q

When a corporation distributes appreciated property to its shareholder’s it must increase E&P…

A

By the E&P gain

30
Q

E&P gain calculation

A

E&P gain = property’s FMV - E&P adjusted basis

31
Q

When a corporation distributes its own obligations (notes, bonds) to the shareholder, E&P is reduced by…

A

The principal amount, not the FMV

32
Q

If E&P adjusted basis of non cash asset distributed equals or exceeds FMV…

2) if the FMV of the asset distributed exceeds its E&P adjusted basis…

A

E&P is reduced by asset’s E&P adjusted basis

2) E&P is reduced by asset’s FMV

33
Q

Constructive dividend

A

How IRS/courts might recharacterize an excessive corporate

Payment

34
Q

How does the IRS treat the constructive dividends

A

Recast as E&P distribution

Deny corporation offsetting deduction, treat all or portion
Recognized by shareholder as a dividend

35
Q

Without recharacterization, a loan would be… 2 things

A

1 neither deductible to the corporation

2 nor taxable to the shareholder

36
Q

Loans to shareholders may be viewed as disguised dividends unless…

A

The shareholder can prove the loans are bonafide

Shown by their intent at the time they take the loan, and repay
It

37
Q

If shareholder purchases corporate property at a discount from the property’s FMV?

A

The discount may be treated as a constructive dividend to

The shareholder

38
Q

Distribution of Stock dividends

A

Usually not taxable

Taxable when the shareholder’s proportionate interest in the distributing corporation changes

39
Q

Taxable stock dividend distributions include 4 instances

A

1 when shareholder can elect to receive stock or other property
2 some shareholders receive property, others receive an
Increase in proportionate interest of corporation
3 some holders receive preferred stock, others receive common
4 distribution includes preferred and convertible preferred

40
Q

Distribution of Stock rights

A

Nontaxable unless it changes or has the potential to change the
Shareholders’ proportionate interest in the distributing corporation

41
Q

Receiving stock rights less than 15% value of the stock the share holder owns

2) receive 15% or more stock rights of value of stock shareholder owns

A

The stock rights will have a basis of $0, unless the shareholder
Elects to allocate his stock basis between the stock and stock
Rights

2) if 15% or more, it’s mandatory to allocate the basis between
The stock and stock rights

42
Q

If the stock rights expire

A

The shareholder can’t claim a loss

The basis of allocated rights is added back to the basis of
Stock

43
Q

If the taxpayer exercises the stock rights before they expire, what happens to the taxpayer’s basis? Holding period?

A

The basis of allocated rights is added to the basis of stock
Acquired through exercise of the rights

Holding period for stock acquired begins on exercise date

44
Q

If distribution of stock or stock rights is taxable, what is the distribution amount equal to? How is it treated?

A

Distribution amount equals the FMV of stock or stock rights

Distribution is treated like a dividend

45
Q

Stock redemption

A

Corporation’s acquiring its own stock in exchange for corporate
Property

46
Q

Corporate property

A

May be cash, securities of other corporations or any consideration
The corporation uses to acquire its own stock

47
Q

What 3 actions might the corporation take with reacquired stock?

A

1 cancel the acquired stock

2 retire it

3 hold it as treasury stock

48
Q

A redemption may be treated in 2 ways depending on the situation

A

1 redemption resembles a dividend

2 redemption resembles a stock sale

49
Q

When does a redemption resemble a dividend

2) when does the redemption resemble a capital gain sale

A

When the shareholder’s proportionate ownership hasn’t changed
Because of the redemption

2) when there is a change in the proportion of ownership interest

50
Q

5 conditions for stock redemptions to be treated as sales, when redemptions are:

A

1 substantially disproportionate
2 complete termination of shareholders interest
3 not essentially equivalent to a dividend
4 involves partial liquidation of corp. in conjunction with its
Redeeming stock from non corporate shareholder
5 provides funds for an estate to pay death taxes

51
Q

How is a stock redemption taxable as a sale compared to a dividend .

A

Sale: FMV - adjusted basis is taxable

Dividend: whole FMV is taxable, the taxpayer’ basis is surrendered
And added to remaining shares still owned

52
Q

2 advantages of structuring stock redemption as a sale

A

1 capital gains may offset capital losses

2 basis of shares redeemed reduces amount of income recognized

53
Q

Tax consequences of distributing corporations: stock redemptions

A

1 corporation recognizes a gain immediately after transaction,
But not a loss

2 E&P adjustment

54
Q

Corporate E&P adjustments 3

A

1 E&P reduced by redemption treated as dividend
2 E&P reduced by portion of current and ACC. E&P attributable
To redeemed stock in sale
3 any distribution exceeding E&P reduces corporation’s paid-
In capital

55
Q

Stock redemption in which ownership interest remains the same or increases is treated as a dividend, unless…

A

The corporation doesn’t have sufficient E&P

56
Q

Stock redemption: attribution rules

A

Test if stock redemption should be treated as a dividend or sale

Corporate Tax (23 decks)

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